Every small business starts with a few people, initially with the owner and co-founders if there are many. But the business motive is always to grow and achieve its monetary goal. The business operation starts from selling very few products and minimum services for product and services business respectively.

But with time, when business grows you have to add people to your team for your continued operations. For small businesses, it is not practical to have all departments in-house. When a business grows you need accounting, admin and marketing, sales, and all such personnel that your business demands.

Large business has the leisure to have all the departments in-house because of the availability of resources. But small businesses have access to very few resources be it time or money.

In such a case the small business doesn't have all the people on payroll as full-time employees. They have both contractors and employees in their workforce. So, both have different pay and tax treatment which small business has to account for separately.

Classification of workforce employee vs contractors

Worker's classification is designing a strategy to assign tasks to the workforce and what are their responsibilities and right towards you. This process primarily decides what category of staff member the worker fits into. This will decide how you’ll supervise them and what the tax treatment is for each category.

Categories of Workers:

The two main categories of workers are employees and contractors. They can also be explained according to the respective tax form you will have to file as the employer: W-2 form or 1099 form.

W-2 Employees

Employers are responsible to file W-2s, the wage, the wage, and tax statements. These are regular staff members with the potential to work for your company in the long term.

Employers are responsible to withhold their income tax in advance. Then they will use the W-2 to report the income they receive and all of the payments you’ve made to them.

Employees can be meaningful team members to invest in. They can take ownership of the work and help you to make the business better.

1099 Contractors

Contractors legally count as self-employed individuals simply working for you on a contract basis. They are not managed and supervised as regular employees. Generally, they are given less money as compared to the employees you hire as regular staff members.

Employers are not responsible for withholding taxes from contractors, but they are given the amount as mentioned under the terms of the contract. They are responsible for handling and reporting tier taxes to the authorities themselves.

Employers will only report contractor wages to the IRS and IRS form 1099-NEC, non-employee compensation.

What is the Difference between Employees and Contractors?

Employee hiring is a complex process of human resource management. You have to interview a lot of people and hire a suitable one. This requires a lot of formalities and paperwork but is significant for the long-term goal as direct employees are connected ultimately, however, it comes down to what your actual business needs are.

There are several different factors other than taxes that are relevant in explaining the difference between employees and contractors. 

Control over Behavioral

Employers have direct and authoritative control over their employees in a way that they don’t have over contractors. Training can be arranged for employees and they can be taught how to do their job. The employer or another supervisor can then continue to offer specific instructions and feedback about when, where, and how to perform their work.

Independent contractors are supposed to finish their promised work. The employer can be very detailed when entering the term of the contract and review upon receiving the final product. Otherwise, employee

Financial Control

Employers have direct financial control over employees. Because employees pay them direct wages and they use company resources which tends to fall under overheads associated with having in-house employees.

Contractors are more probable that they spend their own resources in the course of their work, and they may or may not be reimbursed for it. Contractors are generally paid at a flat rate, and the business has no control over how contractors utilize their resources in meeting their productivity goals.

How to determine what your business needs for an employee or a contractor

The following are the criteria for whether you need an employee or a contractor for your business.

If you need to hire for the long-term main goal-oriented and core activity you should consider hiring employees.

If you already have employees or contractors, you can possibly apply the criteria explained in the article to decide and manage whether you need an employee or contractor for the role.

The hiring process as explained above has financial consequences. In order to plan for the hiring process's financial consequences, you can contact Professionals at Bookkeeping Pro Services who give you the best possible financial advice on whether you should hire an employee or contractor.